How to Never Run Out of Money

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As you finally get up the nerve to look at your dwindling account balances from 2008, you may find yourself increasingly concerned about how you'll save enough for what you'll hope will be a long retirement. A relatively new twist on a traditional insurance product promises some relief for those looking to protect themselves from outliving their retirement savings -- but is it the best option for you?

Insurance companies have sold immediate annuities for years. In exchange for a one-time payment, you can guarantee yourself a stream of monthly income for the rest of your life. But if you don't need money right now, you can get even more down the road by putting off taking payments until later in your lifetime.

The basics
Longevity insurance combines the certainty of an immediate annuity with the option to defer payments into the future. By making an up-front payment, you can buy a policy that will pay you a fixed amount every month, starting at whatever age you choose. Companies including MetLife (NYSE: MET) and Hartford Financial (NYSE: HIG) sell these products.

For instance, say you're about to retire at age 60. You're confident that you have enough savings to live comfortably for 15 years, but if you live beyond that, you're concerned that you'll need supplemental income.

You could buy a longevity insurance policy that would start making monthly payments to you at age 75. According to one policy quote provider, a man paying $100,000 for such a policy could guarantee payments of more than $2,500 per month, while a woman would receive $2,200 monthly.

With annuities, many investors get concerned about what happens if they die before they start taking payments. Although a plain-vanilla annuity would leave nothing for heirs after you die, typically, longevity insurance lets you choose from a variety of guaranteed-payment and death-benefit options that will reduce your monthly payment, but provide for something to be left for your beneficiaries.

Multiple scenarios
There are a number of ways you can use longevity insurance to prepare for retirement:

• If you still have 15-20 years before you plan to retire, you can buy a policy that will kick in at your retirement age, basically acting as a self-created pension plan.
• If you're about to retire, you can lock in extra income in future years, when you're less certain you'll be able to cover expenses.
• If you've already been retired for a while, setting aside some money to pay out even just 10 years into the future can give you some healthy payouts.

That all sounds great. So the question is: Do you get your money's worth from these products?

The do-it-yourself investing alternative
In considering longevity insurance, it's helpful to figure out what you would do with the money if you don't buy a policy. For a long-term investment, a portfolio of stocks could give you growth over the 15-20 years before you need money.

So as a very simple example, say you had invested that money 15 years ago in five well-known stocks. To be fair, we'll pick some stocks that did well, and others that didn't. Given the multiple bull and bear markets in the interim, how much money would you have now?

Stock	15-Year Annualized Return	$20,000 Turned Into ...
Valero Energy (NYSE: VLO)	20.7%	$335,500
Hewlett-Packard (NYSE: HPQ)	12.1%	$111,300
Kellogg (NYSE: K)	5.7%	$46,100
Citigroup (NYSE: C)	3.1%	$31,800
General Motors (NYSE: GM)	(12.9%)	$2,500

Source: Yahoo! Finance.

After 15 years, your portfolio would be worth a total of $527,200. Using the same example above, a 75-year-old man could take that money and buy an immediate annuity that would pay almost $5,000 a month  -- about twice what the longevity insurance policy would pay.

Of course, which stocks you bought would make a big difference. Pick the wrong portfolio, and you could end up without enough money to cover what longevity insurance would have picked up. That's the whole idea of the insurance: It gives you a guarantee to help offset the uncertainties of the stock market.

As with most insurance products, longevity insurance comes with many options. Before you buy a policy, make sure you understand what will happen in every contingency -- and how much you're paying for the choices you make. Although putting all your money into a longevity insurance policy rarely makes sense, using it as part of a diversified retirement strategy could be a smart move for some investors.

More good ideas on saving for retirement:

• Why there's light at the end of the bear market tunnel.
• What to do now that your retirement has been obliterated.
• Today's the day to start getting rich.